Commerical Paper Flashcards
What is the overall rule for commercial paper?
When a negotiable instrument is duly negotiated to a holder in due course, the holder in due course takes the instrument free of all claims to it, free of personal defenses and subject only to real defenses.
What are the parties to a promissory note called?
Promise or is called the maker and the promisee is called the payee.
What are the parties to a draft called?
Drawer gives the order.
Drawee is ordered to do the paying.
Payee is the beneficiary of the order.
What is needed to qualify as a negotiable instrument rather than just a contract?
WOSSUPP
1) Writing
2) Order or bearer
3) Signed by the maker or drawer
4) Sum certain
5) Unconditional promise or order, and no additional promises or orders
6) Payable on demand or at a definite time
7) Payable in currency.
The writing recites “I promise to pay if the Mets win the World Series.” is this a negotiable instrument?
No it’s a contract because it contains an express condition.
The writing recites “This note is secured by a security interest in collateral described in a separate security agreement between payee and maker. Rights and duties with respect to the collateral are stated in the security agreement”. Is this a negotiable instrument?
Yes, although an instrument “governed by” or “subject to” the terms of some other agreement or stating rights or obligations with respect to the promise or order generally is a contract and not a negotiable instrument, merely referring to another writing containing tangential matters does not of itself make the promise or order conditional.
The writing recites “I promise to pay from the funds I realize from my next
wheat crop” Is this a negotiable instrument?
Yes, the instrument will NOT be deemed conditional merely because it limits payment to a particular source or fund.
The writing recites “I promise to pay $75,000 principal amount plus interest.” Is this a negotiable instrument?
Yes, when the instrument states that it
is payable with interest, but does not state how much interest, the judgment rate (the rate on a court judgment), which is set by state statute and therefore fixed, will be
applied.
“I promise to pay by $5,000 or a Rolex watch,” Is this a negotiable instrument?
No because not payable in currency.
“I promise to pay $5,000 and give you
my vintage Beatles album collection” Is this a negotiable instrument?
No because the writing contains additional promises aside from promise to pay money.
“I promise to pay $5,000 On Feb. 1, 2011, but this becomes immediately due and payable if prior to that time the Redskins win the Super Bowl.” Is this a negotiable instrument?
Yes because considered payable at a definite time; acceleration clauses are permissible.
“I promise to pay $5,000 Payable when my first grandchild is born” Is this a negotiable instrument?
No because this feature event is not linked to a date certain
What words must the note or draft use to be considered payable to order?
Pay to Order of [name], Pay to assigns of [name]; Pay to [name].
What words must the note or draft use to be considered payable to bearer?
Pay to bearer, Pay to the order of cash, Pay to cash, Pay to order of bearer, Pay to name of person or bearer.
“Pay $5,000 to Andy Garcia”: Is this a negotiable instrument?
This instrument is lacking order or bearer language. Nevertheless, there’s a special rule for checks. A check not payable to order or to bearer is still negotiable. Here, it’s not a NI unless it is a check (draft), but not if it’s a note.
What are the two ways that a defendant can get sued in a commercial paper fact pattern?
- Signature liability
2. Warranty (transfer) liability
Who may be sued for signature liability?
Maker of a note or drawer of draft that fails to pay as promised may be sued.
Indorser of a note or draft where the maker or drawer doesn’t make payment.
What should a drawer or Indorser of a draft do to avoid signature liability?
Write the words “ without recourse” together with the signature.
Who may be sued for breach of warranty?
Any transferor who sells the negotiable instrument. Thus, if our transferor is not a donor, he can be sued.
Gwyneth indorses her paycheck from Paramount Studios and remits the check to her agent, for services rendered. Her agent in turn remits the check to Stylist for his services. The check bounces. May Stylist sue
Gwyneth?
Yes, warranties run with an indorsed instrument.
What are the five warranties made by the transferor of a negotiable instrument?
Transferor
- has good title to instrument
- All signatures are genuine or authorized
- Instrument is not materially altered
- There is no defense or claim good against the transferor
- Has no knowledge of any bankruptcy or insolvency action against the maker or drawer.
Bobby Donnell indorses his paycheck by signing his name on the back and delivers it to Elinor, who loses it. Jimmy finds it and cashes it at Gullible Grocery. Is Gullible Grocery a holder?
Yes, because the indorsement was a “blank indorsement” (didn’t name a specific indorsee and was properly negotiated by delivery alone)
Bobby Donnell indorses his paycheck, “Pay to Helen Gamble, /s/ Bobby Donnell.” Helen loses the check. Jimmy finds it, signs Helen’s name on the back and cashes it at Gullible Grocery. Is Gullible Grocery a holder?
No because Helen is an indorsee to this “special indorsement” and Helen ever indorsed the check gullible grocery couldn’t become a HDC.
Bobby Donnell indorses his check, “For deposit only, Bobby Donnell.” Lucy steals the check from Bobby and cashes it at Stupid Bank. Is Bank a holder?
No, this is a “restrictive indorsement,” i.e. Contains a condition. Because bank didn’t pay attention to the restriction bank cannot be a HDC. Bobby has an action for conversion against the bank.
